# LTV:CAC and CAC Payback

> LTV:CAC measures whether your acquisition is profitable; CAC payback measures how long the invested capital stays tied up. Both must hold at once: a ratio of at least 3, payback under 12 months in SMB up to 24 in enterprise, both calculated on gross margin.

- Canonical URL: https://www.convios.com/en/methods/ltv-cac-payback
- Language version: https://www.convios.com/de/methodik/ltv-cac-payback
- Status: Externally proven
- Method library: https://www.convios.com/en/methods — Markdown: https://www.convios.com/en/methods.md

## Problem

You want to know whether your growth machine is healthy before feeding it more money. Revenue growth alone does not answer that: a model can grow while destroying capital on every customer or tying it up for too long. Investors examine exactly these two metrics before funding scale.

## Approach

1. Calculate LTV as (ARPA × 1/churn rate) × gross margin, not on a revenue basis.
2. Capture CAC fully: media spend, marketing payroll and sales commissions divided by customers won.
3. Form the LTV:CAC ratio; the target is at least 3.
4. Calculate CAC payback in months on a gross-margin basis; target under 12 months in SMB, up to 24 in enterprise.
5. Read both together: below 3 the model needs fixing, well above 3 with short payback suggests underinvestment.

## Example

A typical case, as an illustrative calculation: a B2B SaaS spends an all-in 10,000 euros to acquire a customer. The customer generates 8,000 euros in annual revenue at 80 percent gross margin, so 6,400 euros of contribution per year, and stays five years on average. LTV is therefore 32,000 euros, the ratio 3.2:1, payback just under 19 months. That works for an enterprise motion; for an SMB business the same payback would be a warning sign, since under 12 months is expected there.

## Limits

Averages hide segment differences; calculate by segment and channel, not just in aggregate. For lender and embedded-finance models the SaaS margin logic does not apply; the spread calculation does. The metrics rest on churn assumptions that are still unstable in young companies.

## Metric

LTV:CAC ratio (target at least 3) and CAC payback in months on gross margin, reported separately by segment.

## Sources

- Valuing Customers, Gupta, Lehmann & Stuart, Journal of Marketing Research — American Marketing Association / Columbia Business School (Volltext), 2004 · academic and scholarly literature · supports the underlying mechanism. Defines customer value as the sum of discounted future returns from margin, retention and acquisition cost, and quantifies how strongly these three drive enterprise value. (https://business.columbia.edu/sites/default/files-efs/pubfiles/534/Valuing_Customers--JMR_2003.pdf)
- Scaling to $100 Million, Bessemer Venture Partners (BVP Atlas) — Bessemer Venture Partners, BVP Atlas, n.d. · investment, consulting and analyst firms, industry bodies and public agencies · provides benchmark figures. States a ratio of customer value to acquisition cost of at least 3 as a health threshold and ties it to segment-dependent payback periods. (https://www.bvp.com/atlas/scaling-to-100-million)
- SaaS Metrics 2.0 · Definitionen, David Skok (forEntrepreneurs) — forEntrepreneurs, n.d. · practitioner source · describes the method. Carries the calculation rule of computing customer value on gross margin rather than revenue, plus the benchmarks of a ratio above 3 and payback under twelve months. (https://www.forentrepreneurs.com/saas-metrics-2-definitions-2/)
- Primary source: Valuing Customers, Gupta, Lehmann & Stuart, Journal of Marketing Research (https://business.columbia.edu/sites/default/files-efs/pubfiles/534/Valuing_Customers--JMR_2003.pdf)

## Related

- Method: [Cash Flow Trough](https://www.convios.com/en/methods/cash-flow-trough)
- Method: [CAC Payback by Segment and Cash Conversion Score](https://www.convios.com/en/methods/cac-payback-by-segment)
- Method: [Tiered LTV:CAC Targets (3/6/9/12)](https://www.convios.com/en/methods/tiered-ltv-cac)
- Method: [Magic Number](https://www.convios.com/en/methods/magic-number)